Alarms sound over local subway drive

The push for more underground rail networks and high-tech industry is raising concerns that over investment may rear its head again

Mainland provinces and cities have moved quickly into higher-end manufacturing and plan to spend more on subways and intercity transit projects.

The move is in response to Beijing's urbanisation push and part of the nation's drive to transform its economic growth model away from labour-intensive industries. But observers warn that the old malady of overinvestment may be back and could eventually lower industrial productivity, holding back Beijing's pursuit of sustainable growth.

Over the decades, local governments across the mainland have scrambled to build highways and steel mills, creating lots of idle capacity. Although the focus of those authorities has gradually shifted from highways and bridges to urban transport networks, and from making cheap textiles to jet manufacturing, experts are worried that some projects, particularly ones that struggle to generate returns in the near term, will add to the fiscal burden on provincial authorities and raise financial risks.

Those observers have urged local authorities to limit borrowings to within their repayment capacity and consider likely returns before making bets.

Some academics, like Li Yang, deputy president of the Chinese Academy of Social Sciences, a government-backed think tank, have called on local governments to compile balance sheets in a bid to better gauge risks.

As local authorities try to increase labour mobility and attract more businesses, they have spent more on subways and intercity high-speed rail.

According to a report by the Organisation for Economic Co-operation and Development (OECD), Beijing has approved the construction of and extensions to subways in 33 cities since 2008, bringing the total number of cities with subways to 35.

The OECD estimates that by 2030, the total length of subway networks throughout the mainland could approach 11,000 kilometres.

"There may be a degree of overinvestment in subway networks in smaller cities," the report said.

There may be a degree of overinvestment in subway networks in smaller cities

For example, Xiamen, a coastal city with 2.3 million people in Fujian province, has already built 31 kilometres of subway lines and plans to add another 215 kilometres down the track, according to OECD data.

Once the network is completed, Xiamen will have 107 kilometres of line for every one million people, compared with just 27.2 kilometres for every million people in Tianjin, a northern industrial city with 11.1 million residents.

Li said many local governments might need to halt subway projects to stop throwing more money "into a huge hole".

He said most subway operators around the world had suffered losses, including the network in Beijing, which loses between 15 billion yuan and 18 billion yuan a year.

Those losses had to be covered by municipal government subsidies.

"Building subways is like filling the roads with gold," Li said. Investment has also been shifting to sectors identified by the country's leadership as of strategic importance, such as high-end equipment manufacturing and some environmentally friendly projects.

Beijing has pledged to raise the share of output from these strategic industries to 15 per cent of the national economy by 2020. It has encouraged banks to lend to these projects and rein in credit for high-polluting and energy-intensive businesses.

One area that came in for encouragement was wind power, but Beijing has begun to limit new investment in this sector after years of aggressive spending left more than half of the capacity excess to requirements, according to industry analysts.

Manufacturing of private jets is another industry that has taken off.

About 28 provinces and cities across the mainland have made development of general aviation part of their plans to move up the industrial chain, Meng Xiangkai, chairman of China Aviation Industry General Aircraft, said.

Meng's company, the sole big player in the general aviation market, is a unit of the country's largest plane maker, Aviation Industry Corporation of China.

Meng welcomed the trend. He said some analysts forecast that airplane manufacturing, raw material sourcing, flight training, and other services would expand to about one trillion yuan (HK$1.25 trillion) in annual sales.

"[But] there might be a mismatch between people's expectations about the market and its actual growth rate, which could pose a huge risk," Meng said.

"You might have made every preparation needed for entering the market. But you may end up to becoming sacrificed if market demand fails to pick up as anticipated."

Li said his studies indicated that the corporate sector's debt level had been on the rise following massive investment in the past several years, which might expose more problems if the nation's growth slowed further.

"If excessiveness can be squeezed further, our economic growth will be healthier," he said.